Societas Europaea A Cyprus Law View

Authors

Christos Mitsides, Senior Partner
Chr. P. Mitsides & Co LLC

1. What is an SE (Societas Europaea)

The SE (Societas Europaea or European Company), is a form of company that can be incorporated anywhere within the territory of the European Union, and operates on the basis of a unified system rather than being subject to different state regulations. European Companies are regulated by the Regulation No 2157/2001/EC (“Regulation”). An SE can register in any Member State of the European Union, and may transfer its registered office within the Community without dissolving the company in one Member State in order to form a new one in another Member State.

2. Incorporation

The various ways for establishing an SE are set out in Articles 2 and 3(2) of the Regulation:

by the merger of two or more existing public limited companies from at least two different Member States of the European Union;

by the formation of an SE as a holding company (“Holding-SE”) to hold public or private limited companies in at least two different Member States;

by the creation of a joint venture between companies (or other entities) in different Member States;

by the transformation of an existing public limited company, which has, for at least two years, had a subsidiary in another Member State.

2.1 Limited Liability of the Members

Upon its registration, an SE acquires a “separate legal personality” (article 16 of the Regulation) and the liability of the shareholders is limited to their contribution to the SE’s share capital. The doctrine of separate legal personality is deeply entrenched in Cyprus company law, (Salomon v. A. Salomon and Co. Ltd. [1897] AC 22 HL.) and as a result it would be rare for a Cyprus court to disregard it and hold the shareholders personally liable for the debts and obligations of the company.

2.2 Capital

The SE must have a subscribed capital of not less than EUR 120,000 in accordance with Article 4 of the Regulation.

2.3 Registered Office / Seat

There is no requirement under Cyprus law for a company’s head office and registered office to be located at the same address. Article 7 of the Regulation however, stipulates that the head office and registered office must both be located within the same Member State in order to ensure that the effective management and control lies in the same county where the registered office is located . As already mentioned the SE may transfer its registered office to another Member State subject to the provisions of Article 8 of the Regulation. (see paragraph 6 below.)

2.4 Statutes

A distinguishing feature of Cyprus law and all the Common Law systems is the extent to which a com-pany’s internal affairs are regulated by its constitution (Memorandum and Articles of Association). This is in marked contrast to other Member States, such as Germany, where a company’s internal affairs are more heavily regulated by the companies’ legislation (e.g. the Aktiengesetz). It should be noted, how-ever that, the importance of the statutes as a source of rules for a Cyprus-registered SE, such impor-tance has been diluted, because Title III of the Regulation governs the structure of the SE (board and general meeting of shareholders) more extensively than the Companies Law or the Common Law in rela-tion to a PLC. The statutes of an SE registered in Cyprus must state the following:

the company’s name and situation of its registered office and the objects of the company;

whether the company has adopted a one-tier or two-tier board structure and the number of members of the administrative organ (one-tier system), or the management organ and super-visory organ (two-tier system);

where the company has adopted the two-tier system, the categories of transactions which re-quire authorisation of the management organ by the supervisory organ (Article 48 of the Regu-lation).

3. Management and Supervisory Bodies

The two-tier board structure is, an unfamiliar concept in Cyprus. Article 39(5) of the Regulation permits Member States to adopt special measures for two-tier SEs where there was no provision for a two-tier system under that Member State’s PLC law. PLCs registered in Cyprus have a unitary board structure, with the management and supervisory func-tions being discharged by a single body. The Companies Law Cap. 113, has not laid down requirements for the composition of the board of directors and leaves the matter to be determined by the company’s statutes. In practice, however, an important distinction between executive and non-executive directors has emerged. The executive directors are responsible for the day-to-day management of the company. The non-executive directors are not involved in the day-to-day running of the business and do not have a contract of employment. Their role is to monitor and supervise the conduct and performance of the executive directors. The role and function of the supervisory board in continental Europe is broadly analogous to the role and function of non-executive directors in Cyprus.

3.1 Dualistic System

3.1.1 Management

The management organ is responsible for managing the SE (Article 39 of the Regulation). The number of members of the management organ and the rules for determining its composition are laid down in the SE’s statutes. The management organ is obliged to report to the supervisory organ at least once every 3 months on the progress and foreseeable development of the SE’s business. Although pursuant to Article 48(1) of the Regulation the task of running the SE is entrusted to the management organ, the SE’s statutes must list categories of transactions which require authorisation of the management organ by the supervisory organ. Furthermore, there are certain corporate actions which, as a matter of Cyprus law, the manage-ment organ cannot take without obtaining the prior approval of the SE’s shareholders (e.g. increasing or reducing the SE’s share capital, amending its statutes).

3.1.2 Supervisory Body

The function of the supervisory organ is to supervise the work of the management organ (Article 40(1) of the Regulation); it may not, itself, exercise the power to manage the SE. Article 41 of the Regulation provides that the management organ is to report to the supervisory organ every three months on the progress and foreseeable development of the SE’s business and, in addition, it must promptly notify “any information on events likely to have an appreciable effect on the SE”.

3.2 Monistic System

3.2.1 Board of Directors

Cyprus law is intrinsically better suited to regulating SEs with a unitary board structure. Subject to the company’s statutes, members may be appointed for a term of office not exceeding six years, and are pursuant to the provisions of Art. 46(2) of the Regulation, eligible for re-appointment. The SE’s statutes govern the circumstances in which the members of the administrative organ can be removed from of-fice. It should be noted, however, that notwithstanding anything in the SE’s statutes, the shareholders of the SE may remove a director by simple majority vote in accordance with section 178 of the Compa-nies Law Cap. 113.

3.3 Corporate Governance

The function of the supervisory organ is to supervise the work of the management organ. Accordingly, there will be times when Cyprus law regulating the conduct of the directors of PLCs shall apply in equal measure to the members of the management organ/ administrative organ and the supervisory organ. However, in view of the exclusion of the supervisory organ from any role in managing the SE’s business, there will be some instances when Cyprus law governing the directors of PLCs will not apply to the members of the supervisory organ. Directors’ duties and corporate governance are regulated in Cyprus by:

the Common Law (that is, case law relating, for example, to directors’fiduciary duties);

The company’s constitution;

the Listing Rules where the company’s shares are admitted to the Official List of the Cyprus Securities Commission.

3.4 Liability of the Managers

Article 51 of the Regulations provides that members of an SE’s management, supervisory and adminis-trative organ shall be liable, in accordance with the provisions applicable to PLCs in the Member State in which the SE is registered, for loss or damage sustained by the SE following any breach on their part of the legal, statutory or other obligations inherent in their duties. As discussed above, executive and non-executive directors owe the same legal duties to their company, but in regulating these duties, the courts have acknowledged the more limited involvement of non-executive directors in the day-to-day conduct of the business. It should be noted that the supervisory organ is a novel concept in Cyprus law. It does not therefore follow that the duties and liabilities of a member of the supervisory organ of an SE will mirror those of a non-executive director of a Cyprus PLC. This will be a matter for interpretation by the courts. A director of a PLC, and hence an SE, registered in Cyprus may incur personal liability in the event he is in breach of his Common Law fiduciary duties, his Common Law duty of skill and care, or in cases of fraud. I should be noted, however, that in Common Law directors act as agents of the company, so shareholders or third parties will normally only have a cause of action under Cyprus law against the company, not against individual directors. However, directors may also incur personal liability to share-holders and third parties where they act in a way which creates a personal obligation. This is not lightly implied, but could be assumed, for example, by an express representation by a director accepting a per-sonal obligation to the shareholder or third party.

4. General Assembly of the Shareholders

4.1 Competences of the General Assembly

The general meeting of shareholders may pass ordinary, special or extraordinary resolutions (an ordinary resolution will be passed if a simple majority of those voting vote in favour of it. Special and extraordinary resolutions will be passed if 75% of those voting vote in favour).) (as appro-priate) in respect of the following matters:

appointment and removal of members of the supervisory organ (two-tier system) (it is debatable whether, in view of Article 39(2) of the Regulation, the shareholders of an SE registered in Cyprus may remove the members of the management organ from office following the procedure laid down in section 178 of the Companies Law) and the administrative organ (one-tier system);

the receipt and approval of the SE’s annual accounts and the accompanying report of the management organ/administrative organ;

ratification of any breach of duty by the members of the management organ, supervisory or-gan or the administrative organ and indemnification of the members against any liability aris-ing from such breach;

amendments to the SE’s statutes (name, objects, share capital);

approval of a reduction of the SE’s share capital or a purchase of the SE’s own shares;

declaration of dividends;

implementation of reorganisations, in particular, mergers, demergers or conversion of the SE into a PLC;

the winding-up or liquidation of the SE;

the transfer of the registered office; and

resolutions on any matters assigned to the general meeting by the management organ, super-visory organ or administrative organ.

5. Annual Accounts and Audit

An SEs annual accounts must comprise:

a profit and loss account;

a balance sheet;

a report of the management or administrative organ containing a fair review of the develop-ment of the SE’s business;

an auditors’ report.

The auditors’ report must state whether, in the auditors’ opinion, the annual accounts have been prop-erly prepared in accordance with law and, in particular, whether they give a true and fair view of the company’s financial affairs. A company registered in Cyprus may only pay a dividend where it has sufficient distributable profits and by reference to properly prepared accounts . While the members of the management or administrative organ will recommend payment of a dividend, it will be the shareholders who actually declare it in gen-eral meeting.

6. Cross-border Transfer of the Registered Office

Article 8 of the Regulation empowers the SE to transfer its registered office from one EU Member State to another. The transfer of the SE’s registered office must be approved by a special resolution (a special resolution is required by virtue of Article 59 of the SE-VO) of the shareholders in general meeting [no decision to transfer may be taken for two months after publication of the transfer proposal (article 8(6) of the SE-VO)]. The management or administrative organ of an SE registered in Cyprus must draw up a transfer proposal and file a copy with the Registrar of Companies. Before the Registrar of Companies may issue the certifi-cate, he must be satisfied that creditors’ interests have been adequately protected in accordance with the requirements laid down by the Regulation. In accordance with Article 8(1) of the Regulation, the transfer of an SE’s registered office and the conse-quent amendment of its statutes are effective on the date on which the SE is registered in the new Member State. However, until such time as the deletion of the SE’s registration from the register for its previous. If proceedings for winding-up, liquidation, insolvency or suspension of payments or other similar pro-ceedings have been brought against the SE, then it is precluded from transferring its registered office (article 8(15) of the Regulation).

7. Winding-Up and Liquidation

Article 63 of the Regulation provides that the domestic law of the Member State in which an SE has its registered office governs the winding-up, liquidation and insolvency of that SE. Accordingly, in Cyprus, the EC Regulation on Insolvency Proceedings (1346/2000/EC) (“EC Insolvency Regulation”), and the Winding-Up Rules will apply. It is a requirement under Article 7 of the Regulation that the registered office and head office of the SE are located within the same Member State. It is therefore assumed that where the SE is registered in Cyprus its “centre of main interests” within the meaning of Article 3 of the EC Insolvency Regulation shall be in Cyprus.